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How Much Home Can You Afford?

Chad Young
Educational Opportunities: 
Home > Education & Events > July 2018 > How Much Home Can You Afford?

Hi, welcome to Compeer Financial's series: Building Your Future, Tips for Country Home Construction. My name is Chad Young and today I'm going to tell you about a term that we use in the mortgage industry that helps us determine how much of a loan amount a client can qualify for. That term is debt to income ratio or DTI. What DTI means is the combination of all of your bills, including your new mortgage payment, taxes and insurance included, need to be below a certain percentage of your gross monthly income, gross income meaning pretax income. I think the best way to explain this is to go through a math problem. What I'd like to encourage you to do is to grab a pencil and paper before you continue.
All right, now that you're ready with pencil and paper in hand, let’s begin. At Compeer Financial when we're talking about construction loans, our guidelines state that the DTI ratio maximum percentage is 36%. This means that all of your bills, including your new home mortgage payment shouldn't exceed 36% of your gross or pretax income.
Let's go through a scenario. Write down 8,000. In our scenario the household income for the client is going to be $8,000 per month. Take 8,000 times .36, that's 36% of 8,000. You should come up with $2,880. 2,880 is the number that all of your bills, including your new mortgage payment, plus taxes and insurance can't exceed.
Let's assume the client has $500 a month of car loans, $400 a month of student loans and $200 a month of credit card debt. The math problem is 2,880 - 500 - 400 - 200 = 1,780. So 1,780 is the number that the new home mortgage payment, including taxes and insurance can't exceed. So 1,780 includes principal and interest, taxes and insurance. Let's assume your property taxes are about $1,200 per year. You would take 1,200 divided by 12 for 12 months and you have $100 a month of property taxes. We'll do the same thing for insurance to make the math problem easy.
It's 1,780 minus $100 for property taxes minus $100 for homeowner's insurance and you should come up with of course 1,580. So in this scenario the clients would qualify for a principal and interest payment of about $1,580 per month. Now, how does 1,580 translate into a loan amount? What's really cool about the website that we have at Compeer is that we have the ability to play with the numbers. First I would go and find what the going rates are for a 30 year fixed loan are and today's rate as I record this, a 30 year fixed interest rate is about 4.625. Take that information, go to our mortgage calculator and start playing with the numbers.
You'll put in the interest rate and then you can work the numbers to find out how much of a loan that qualifies you for. Today's scenario of $1,580 would qualify the client for a principal and interest loan amount of about $300,000. What I would encourage you to do is go back through this video and use your own numbers and personal information. That should give you a pretty good idea of how much of a loan amount you would qualify for. Now, at Compeer we have loan officers all throughout our area that would be more than willing to help you through this.
What you can also do is go to our website and find the loan officer that's closest to you. Give us a call and we'd be more than happy to do this with you. Also on our website there are many more tools and videos that you can use as a resource if you have further questions or just want more information. Folks, I appreciate you taking the time today to learn about your debt to income ratio and how that translates into a loan amount. Again, if you have any other questions, feel free to reach out to us.
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